Higher food prices slow the decline in inflation

Inflation remains on a broadly downward trend but has fallen less quickly than had been expected because of an upsurge in food prices in the first quarter. Price growth had slowed to 32% year on year in January, a fifth successive monthly decline from a recent peak of 40.6% in August—helped by a good main harvest in the fourth quarter—but climbed again to 36.3% in February. Inflation subsequently subsided to 32.6% in March and 29.8% in April, but these figures were much higher than had been predicted because of very rapid month-on-month price increases amounting to 2.8% in February, 4.6% in March (the biggest jump for a year) and 2% in April. Brisk growth in food prices (especially for meat, fruit and vegetables, pulses, and cereals), which account for 57% of the consumer price index, was the main driver behind the monthly increases. This can be explained in part by poor seasonal (belg) rains in the first quarter combined with higher transport costs following an increase in world oil prices. Perennial constraints in the marketing and distribution system, including a lack of competition at the wholesale level, amplified the trend. Monetary loosening in January may also have contributed to higher inflation, although recent data on money supply and credit growth is not yet available. Although inflation will continue to edge downwards, helped by a modest slide in world oil prices in May, the Economist Intelligence Unit has revised its inflation forecast for 2012 upwards to 21.7% (from 15.7%) because of recent food-price spikes. However, we expect inflation, on a year-on-year basis, to return to single-digit territory in the first quarter of 2013, provided that the next main harvest in the fourth quarter is average or better.